Department Of Justice Flip-Flops On Internet Gambling

On the Friday before the Christmas weekend, the Department of Justice revealed that it had changed one of its most important and long-held positions on Internet gambling, stating that the federal Wire Act of 1961 only applies to sports betting. The new position on the Wire Act marks a huge shift for the Justice Department, which has long relied on the law when asserting that all forms of Internet gambling, especially online poker, is illegal.

“The Department’s Office of Legal Counsel (“OLC”) has analyzed the scope of the Wire Act, 18 U.S.c § 1084, and concluded that it is limited only to sports betting,” U.S. Deputy Attorney General James Cole wrote in a letter on Friday.

There are potentially far-reaching consequences to the government's new position on the Wire Act, which is a huge victory for state lotteries that hope to use the Internet to sell lottery tickets to adults in their states. New York’s lottery division and the Illinois governor’s office had asked in 2009 for the Justice Department’s view regarding their plans to use the Internet. In a 13-page legal opinion written by Assistant Attorney General Virginia Seitz and dated September 20, the Justice Department says “nothing in the materials supplied by the Criminal Division suggests that the New York or Illinois lottery plans involve sports wagering, rather than garden-variety lotteries. Accordingly, we conclude that the proposed lotteries are not within the prohibitions of the Wire Act.”

For years the Department of Justice’s criminal division argued that the application of the Wire Act went far beyond sports wagering. The previous position not only impacted state lotteries, it played an important role in the Justice Department’s ongoing legal battle with offshore online gambling firms, particularly those that offer for-money online poker to U.S. players. As recently as 2007, then U.S. Attorney Catherine Hanaway said in congressional testimony that the Wire Act applied to all Internet gambling. “The Department of Justice’s view is and has been for some time that all forms of Internet gambling, including sports wagering, casino games and card games, are illegal under federal law. While many of the federal statutes do not use the term ‘Internet gambling,’ we believe that the statutory language is sufficient to cover it,” Hanaway said. “As we have stated on previous occasions, the department interprets existing federal statues, including 18 U.S.C. Sections 1084, 1952, and 1955, as pertaining to and prohibiting Internet gambling.”

The Justice Department’s previous position on the Wire Act has in the past been seen as the backbone of its argument that online poker violated U.S. law. It has also been applied in court. In 2008 Anurag Dikshit, a co-founder of PartyGaming, which was primarily an online poker company, pleaded guilty in federal court in Manhattan to violating the Wire Act. Dikshit agreed to pay $300 million and was sentenced last year to one-year of probation. At the time, the U.S. Attorney’s office in Manhattan said “from about 1997 through October 2006, PartyGaming PLC, a Gibraltar corporation, and its predecessor and affiliated corporate entities (collectively “PartyGaming”), operated an Internet gambling business which offered casino and poker games, among other games of chance.”

Still, in recent months it had become clear that the Justice Department was moving away from the interpretation that online poker violated the Wire Act. In April 2011 Preet Bharara, the U.S. Attorney in Manhattan, indicted 11 individuals in an online poker crackdown and launched a $3 billion civil lawsuit against online poker firms like PokerStars and Full Tilt Poker, but Bharara conspicuously did not include any Wire Act violations in the indictment. Instead, Bharara alleged that the indicted men had violated the Unlawful Internet Gambling Enforcement Act, which became law in 2006, and the Illegal Gambling Business Act, which Hanaway had also referred to in her 2007 testimony. In addition, Bharara accused some of the men of bank fraud violations.

Now, the Justice Department believes that the Wire Act does not apply to online poker. In fact, the Justice Department’s office of legal counsel is saying that the criminal division got it wrong on the Wire Act. “We conclude that the Criminal Division’s premise is incorrect and that the Wire Act prohibits only the transmission of communications related to bets or wagers on sporting events or contests,” the new legal opinion says.

In a letter sent on Friday to Senate Majority Leader Harry Reid, Assistant Attorney General Ronald Weich said: "in states that ban various forms of gambling--including Internet poker--the Department will be able to investigate and prosecute those gambling businesses under the Unlawful Internet Gambling Enforcement Act and other sections of the criminal code."

In their submission to the Justice Department’s criminal division, both New York and Illinois made the same kind of argument the online poker industry has been making for years, namely that the Wire Act is inapplicable to lotteries because it does not cover communications related to non-sports wagering. “The Wire Act’s legislative history reveals that Congress’s overriding goal in the Act was to stop the use of wire communications for sports gambling in particular,” the Justice Department’s legal opinion says. “Our conclusion that subsection 1084(a) is limited to sports betting finds additional support in the fact that, on the same day Congress enacted the Wire Act, it also passed another statute in which it expressly addressed types of gambling other than sports.”

Mark Hichar, a partner who heads the gambling law group at Edwards Wildman, said the opinion could potentially open the door for states to cooperate together on lottery initiatives and other gambling offerings like Internet poker and other casino games. “The Department of Justice at long last has removed a cloud that existed with respect to intrastate Internet wagering and we have yet to see how far reaching its implications will be,” Hichar said.